[Liquidity has since returned to the curve, but not before we were able to take profit on some trades and get some things on at favorable levels]
The other week, I mentioned that some locals may have blown up on three month fly trades in the whites. I think some market participants had been “smoothing” the front of the fly curve, without really thinking about what was being priced into the curve. I suppose if you are young enough, you’ve mostly seen smooth 3 mo fly curves. I may discuss “smoothing the fly curve” further in a future issue of the CA.
The end of last week, I noticed very thin markets in the year spreads past the Z0-Z1 spread. Strangely little had traded in those year spreads, considering the large move we had. Part of this could have been the fact that the ECB caused a disruption in the Force, and the marketmakers decided to back off temporarily. But I’m also wondering if when the front end flies blew up, that caused stops with locals that were making markets in the long end of the curve.
All other things being equal, I am generally of the opinion that less liquid markets present more of an opportunity. This could be good for us in the long run, since now we have some P&L opportunities those locals may had been picking up. You may have to be a little more patient, and size more comfortably. But this could be helpful to flipping P&L on the long end. Watch the markets for some good opportunities…